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Consumers rediscover thrift

After racking up total debts of just under £1.5 trillion, UK consumers are cutting back and borrowing less. Figures from the Bank of England show that consumers repaid loans to the tune of £600m in July, which was the first net repayment since records began in 1993.


In fact the 12-month growth rate of total net lending to individuals fell by 0.3 percentage points to 0.9% in July. Within this, net lending secured on dwellings showed a net repayment of £0.4bn. So, although new mortgage approvals rose to just over 50,000 in the month the total value of mortgage lending actually declined, as repayments exceeded new financing.


There was also a fall in consumer credit in July of £0.2bn, with the 12-month growth rate falling from 2.0% in the previous month to 1.4%.


Consumers are staying in and saving the pennies.

Consumers are staying in and saving the pennies.

This return to thrift could delay the economy’s escape from recession. Although saving is considered a virtue, it is spending which the government is looking for in order to boost aggregate demand. This is why the Bank of England has invested so heavily in quantitative easing, in the hope that there would be more liquidity in the economy to facilitate greater lending. We have seen recently that the banks have been reluctant to lend but at the same time consumers have been reluctant to borrow.


It does seem that the Bank’s efforts are boosting liquidity as the broad measure of the money supply, M4, which includes notes, coins and deposits at banks, grew by 0.6% in July to give a 12-month growth rate of 5.3%. However, it is difficult to criticise consumers, who following the example of the banks, are trying to get their personal balance sheets in order. Whilst there are still worries about the recession and the possibility of increasing unemployment, people are being cautious. Those who hold mortgages are taking the windfalls from lower mortgage rates and using them to pay down debt, rather than going on a spending spree. The impact of this on the economy overall may not stall the recovery altogether but may slow it down.

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Posted in Bank of England, Consumer Expenditure, Interest rates, Lending, Money Supply, recession

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